Health insurance link to employment should be dropped, Fuchs says

STANFORD -- When Victor Fuchs, a distinguished Stanford economist,
proposed an alternative comprehensive health care plan last week, his ideas
made it into a prestigious medical journal but "didn't make Washington's
radar screen," according to Gail Wilensky, a Maryland-based health policy
analyst who once advised President Bush on health care issues.

Washington policy makers have "moved out of the realm of discussing health
care and are really into partisan politics related to the next presidential
campaign," added Judy Miller Jones of the National Health Policy Forum at
George Washington University.

In the Aug. 17 issue of the Journal of the American Medical Association,
Fuchs proposes to reform the health care system by disconnecting health
insurance from employment. Under his proposal Americans would pay for a basic
level of health coverage through a value-added tax on the goods and services
they buy. They would get a voucher for basic health care, choose among
competitive, physician-led integrated-care systems and buy additional
coverage if desired.

Under Fuchs' proposal, each integrated medical care system would be
required to offer a basic plan plus a variety of options. The basic plan
would require some copayments to discourage wasteful use of care. Insurance
coverage for the options - a private hospital room, a wider choice of
physicians or a still-experimental technology - could be purchased by
patients at their discretion, with after-tax dollars.

This is not unlike Stanford's current Triple Option health plan, which
offers those who choose it three levels of coverage, Fuchs and others said.
Employees and their families choose a primary care physician for their basic
health care. If not satisfied, they can seek treatment from other doctors and
specialists but will have to pay a higher percentage of the cost.

"Any plan that will work needs to provide Americans with more than one
level of care option," said James Mark, a cardiothoracic surgeon at Stanford
Medical Center and former chief of staff at Stanford Hospital. "I don't think
that's an awful thing. As long as everybody gets good care, some can pay for
amenities or to jump the queue."

Serious health care reform proposals such as Fuchs' plan are not getting
congressional attention now, said Richard Brody, Stanford professor of
political science, because "most Americans do not feel a sense of crisis when
it comes to health care." Although middle-class workers, such as those at
Stanford, are unhappy with some aspects of their employer-based health
insurance, he said, they are not so unhappy that they want to risk
fundamental change.

"That makes it hard to build a coalition for dramatic policy change, and
every political coalition seems to be trumpable and unstable," Brody said.

New taxes to pay for a health care plan or new mandates on employers
requiring them to purchase coverage for their employees and their families -
what Fuchs calls an "implicit" rather than an explicit tax - are political
pills no one seeking re-election wants to swallow, Brody and other
congressional observers say.

"At the moment, any proposal to add another element to the tax system
would be considered political death," added Robert Hall, Stanford professor
of economics and a senior fellow at the Hoover Institution.

Fuchs, the Henry J. Kaiser Jr. Professor at Stanford with appointments in
economics and the school of medicine, agrees that any plan that "openly
embraces the tax route, as opposed to hidden taxes, is not going anywhere in
Congress until the dust clears." The president-elect of the American Economic
Association is proposing the tax to have it waiting in the wings when more
serious reforms become necessary.

"None of the proposed plans [in Congress] will finance coverage
efficiently and equitably, and slow the rate of growth of health care
spending," he wrote in JAMA.

Impetus for this kind of reform will likely remain because health care
costs are growing at twice the rate of inflation, and the proportion of
Americans without coverage continues to grow, said Alain Enthoven, another
Stanford health care economist whose ideas on managed competition were an
early influence on the Clinton health care proposal. Enthoven has since
become a critic of the Clinton plan because of changes that he said undermine
its intent to curb runaway costs.

"All in all, I think Victor's idea is a serious one that deserves serious
thought. It's something we might come back to in a few years," Enthoven said.

But Enthoven, like Fuchs and Jerry Mashaw of Yale Law School, says he is
worried that Congress may pass a bill this term that will cause more harm
than good.

"I'm afraid that what will pass will eliminate a lot of [insurance
companies'] refusals of coverage [to people with pre-existing health
conditions] and also include requirements that people can keep their
insurance when they change jobs," said Mashaw, a law professor at Yale who
has followed the health care debate and has made his own reform proposal,
which also is getting nowhere in Washington. "All the middle-class fears will
have been solved then, and we'll be left without the political muscle" to
contain medical costs or to assist those who currently cannot afford
insurance.

The current Democratic bills being touted in the Senate and House are
"worse than nothing" because they don't curb health care costs, said
Enthoven, who was among those to urge Sen. Dianne Feinstein, D-Calif., to
withdraw her support for the administration's proposals and to join a non-
partisan group of lawmakers meeting to draft an alternative.

Some, like Stanford's Alan Garber, believe that cost controls might result
from the marketplace with or without government intervention. "Health care
delivery has been changing rapidly, and changing for awhile in the Bay Area
and the West generally," said Garber, an internist and economist on the
faculty of Stanford Medical School with a courtesy appointment in the
Economics Department. "I'm optimistic costs will come under control over the
next few years, but the one thing that won't happen without government action
is universal coverage. The reason there is so much debate in Washington,
aside from the specifics of each plan, is that it costs a lot to have
universal coverage, and the people who vote and pay taxes largely have
complete health insurance already."

Value-added tax

The cornerstone of Fuchs' proposal is a value-added tax (VAT), a funding
mechanism used throughout much of Europe. VATs subtract a company's cost of
purchases from its gross receipts to calculate a tax base. The revenue from
the proposed VAT would be earmarked to purchase vouchers for a basic benefit
package for every American. This proposal wraps substance around a plea Fuchs
made in an open letter to President Clinton in JAMA on April 7, 1993, to
disengage health insurance from employment.

"Sooner or later," Fuchs said in the letter, "the inequities and
inefficiencies associated with employment-based health insurance will become
so apparent as to dictate disengagement. Today, workers' choices of jobs,
decisions about job changes and timing of retirement are frequently
influenced by health insurance considerations."

Surveys suggest that between 10 and 20 percent of the people covered by
health insurance say they are in "job lock," says Yale's Mashaw. "They may
not be uninsurable," he said, but their job options are influenced by
insurance.

As medical costs have climbed, another troubling trend has emerged.
Employers already exclude job applicants because of their potential for
above-average health risks, said Jones, who provides health policy education
to congressional staff and federal agencies. In a recent survey, University
of Chicago researchers reportedly found 30 percent of occupational physicians
said their company wouldn't hire someone with high blood pressure.

Getting Americans to give up employer- based health care may be difficult
politically, Mashaw and others said. Many workers are "under the fiscal
illusion" that they are not paying fully for their health care because their
employer does not report the full cost on their paystubs, he said.

Fuchs believes that such "explicit subsidies" of health care costs distort
incentives and are inevitably expensive to administer.

To illustrate his criticism of Democratic congressional proposals, Fuchs
offered the following example: "A family with an income of $14,000 per year
might be eligible for a health insurance subsidy of $5,000, but this subsidy
would vanish entirely if the family's annual income increased to $28,000.
This 'tax' of $5,000 on the additional income would come on top of Social
Security and income taxes as well as other lost benefits such as food stamps.
In total, families with annual incomes between $14,000 and $28,000 would be
allowed to keep only about 25 cents from each additional dollar of income."

By contrast, with a uniform VAT and voucher system, no consumer could
escape contributing to the system through tax loopholes, and the burden would
increase roughly in proportion to family spending, he said. Everyone, in
turn, would receive the same benefit - a voucher for a basic benefit plan.

"The link between the earmarked value- added tax and the basic plan,"
Fuchs said, "would create a healthy tension between the desire to increase
benefits and the need to pay for the increase in a responsible and equitable
manner."

Similar ideas were considered early in the Clinton administration, Mashaw
said, along with a single-payer system such as that in Canada. They were not
debated in detail because of the administration's early support for a managed
competition plan. Several medical lobby groups contacted by Campus Report
last week said their organizations had taken no position on a value-added tax
or voucher plan.

In a country where even presidential Cabinet nominees are tempted to not
pay Social Security taxes for their nannies, Enthoven said, the value-added
tax is desirable for its "self-enforcing features." And, "over people's
lifetimes, a value- added tax is about proportional to people's incomes, but
in the short run, it taxes consumption rather than savings, and that's a
positive effect, because we need to have a higher savings rate in our
country."

A value-added tax proposal would face two major shortcomings: It would
require new tax accounting and it would be somewhat hidden from public view,
where some fear it would become major pork barrel material for Congress.

"The Treasury Department has played around with a value-added tax for 30
years, and virtually every time they decided the path of political wisdom was
not to propose it," said Yale's Mashaw. "It requires a whole new set of books
that nobody in this country is keeping now. The National Association of
Manufacturers, small businesses and the taxpayers' associations would scream
not only against the tax but against making them fill out new forms."

Cost controls, technology evaluation

To control the escalation of health care costs, Fuchs proposes a series of
measures to make health care decisions more rational. He would accelerate the
creation of integrated health care systems, create an independent technology
assessment center, reduce government subsidies for training specialist
physicians and radically change malpractice laws.

Integrated health care systems can control costs, Fuchs argues in the
current JAMA, because physicians' decisions are the major determinant of the
cost of care. Only in an integrated system do "physicians have the incentive,
the information and the infrastructure needed to make these decisions in a
cost-effective way."

Such systems should be physician led and not dominated by a few large
insurance companies, Fuchs added. While physicians will be interested in
making a good income, he said, "there is a vast difference between a
profit-maximizing corporation and physicians who strive to balance their
obligations to patients, the organization and themselves."

The technology assessment center would be funded with less than 0.1
percent of health care spending and could tame what Fuchs called "the most
important factor accounting for the increase in health care spending," the
rapid change in medical technology. Through intramural and extramural
research, the center would develop data on the cost-effectiveness of various
technologies and offer a rational basis for deciding which services would be
included in the basic plan. A second benefit of the center, Fuchs said, would
be providing legitimacy for physicians who want to practice cost-effective
medicine.

"Technical assessment is important," agreed Enthoven, because "it's very
hard for any one health plan not to provide an unproven technology if
patients want it and believe it would help them."

In one California case, for example, a woman's heirs successfully sued a
health care provider that had refused to provide autologous bone marrow
therapy, an expensive, controversial treatment in which a cancer patient's
bone marrow is removed, he or she is aggressively treated to kill the cancer
and then the marrow is returned to the patient.

A technology assessment board might include some consumers as well as
doctors, said Garber of the Stanford Medical School. "It would not only look
at effectiveness of treatment but also their cost-effectiveness," something
no one health insurer can afford to do now and which anti-trust laws prevent
the industry from doing together.

Individuals and insurance providers would make their decisions
independently about what types of treatment they wanted to provide or buy,
Garber said, "because you don't want some centralized body making the
decisions for every region, every group."

In his current JAMA article, Fuchs writes that a new technology assessment
center - along with elimination of subsidies for the training of specialists
- would "help to contain costs without the imposition of controls or caps
that might stifle innovation and progress."

A new approach to health care, Fuchs writes, "would provide universal
coverage for basic care, free health insurance from employment and slow the
rate of growth of spending while preserving some choice, flexibility and the
capacity for further change.

-kpo-

Don Gibbons of the Medical Center News Bureau contributed to this story.

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